Tax Tips: Should you take the home office deduction?
The "regular use test" requires that you use that space regularly throughout the year for the business. This means that you use the desk or office space more than a few times a year for doing things related to your business.
The "exclusive use test" requires that the space you're claiming be used only for business purposes. So if you've got a spare bedroom with your desk in it, the only space that could qualify for the deduction is that in which the desk is occupied, not the entire room. That space with the desk must also be exclusively for the business in order to qualify. If your child does homework at the desk, it does not qualify. If your wife uses the desk for craft projects, it does not qualify. In like manner, if you use your dining room table for both dinner and business paperwork, you can't do a home office deduction for it.
The economics of the home office deduction may make it better for you to forgo the deduction. The cost of the paperwork and the time spent figuring your deduction might be more than the tax benefit you see from the deduction. Further, taking the home office deduction can have tax consequences once you sell your house, and a tax preparer will be able to tell you whether or not it is worth your while to take a small deduction now but pay later when you sell the house.
Many taxpayers believe that claiming the home office deduction puts them at greater risk of being audited. The IRS won't say one way or another, but they do say that underreporting income by small businesses is a serious problem. There is also the problem of people participating in multi-level marketing companies, business opportunity scams, or pyramid schemes because of the "tax advantages" involved. Many of these opportunities aren't legitimate businesses, so taking any deductions in conjunction with them could get you audited.
There are actually many more detailed considerations that go into determining whether or not you qualify to take a home office deduction, but these are the most important and most common considerations.
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Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.